Mario Draghi won his match against the Bundesbank falcons. If six months ago the word Qe was not even pronounceable by an irreducible Jeins Weidmann, today the quantitative easing is also a reality for Europe. The Eurotower will inject 60 billion euros a month going forward until at least September 2016 and in any case until it has achieved “a sustained adjustment in the path of inflation that is consistent with our goal of having inflation below, but close to 2% in the medium term”. Overall, this is 1,14 trillion euros injected into the economy, a figure that has exceeded market expectations. “The ECB has announced a powerful asset purchase program – say analysts of Swiss credit – Both the amount and pace of purchases are on the high side of our expectations. Along with other interventions that are underway, the program will strengthen the cohesion and economic recovery of the eurozone”. He is also convinced of this governor of the Bank of Italy Ignazio Visco according to which Qe "will be effective in quantity and duration".
The first ones are positive reactions from investors and analysts: "The asset purchase program fully meets the market's expectations in terms of size," said Bill Street, head of EMEA investments at State Street Global Advisors, recalling that "2015 is a pivotal year for Europe and the ECB has chose the path of quantitative easing, in an attempt to change the discount rate curve”.
Of course, the German critics they did not subside and the decision triggered a barrage of reactions between the German ruling class and the stomachs of the "people" with the German newspaper "Bild" with the headline: "What now happens to our money". But outside the Teutonic soil there are still those who point out that Draghi's move was such as to provide a "sop" for the German hawks. For others however, the more unconventional wing of economic thought, it is a real "vulnus". The controversial point concerns risk sharing, i.e. the sharing of the risk of this Quantitative Easing operation. That was capped at 20%, leaving 80% remaining in the hands of individual national governments.
RISK SHARING, SOP FOR THE GERMANS OR TRUE VULNUS?
“The announcement of Quantitative Easing by the ECB has the flavor of a delicate balancing act – commented Paolo Guida, Vice President of AIAF - Italian Association of Financial Analysts and Advisors – Against a positive surprise represented by the amount of monthly purchases, the negative surprise of the “decentralization of risks” stands out, accounting for 80% of total new purchases. In President Draghi's opinion the implications of this decision regarding risk sharing are not significant, but a certain market disappointment is understandable.
Likewise, for the analysts of Socgen the risk sharing decided by the ECB is symbolic because on balance the ECB will buy 70 billion euros on the basis of risk sharing while the national central banks will buy 730 billion overall. An approach, the experts explain, consistent with the belief that the ECB's Qe could not be both broad and "hand in hand" in risk sharing. If most of the comments see in the risk sharing the main weakness of Qe, to Exane what disappoints is rather the decision of the distribution of purchases in proportion to the share of the countries in the capital of the ECB (capital key) and not as a function of the debt outstanding of each country. “A decision – write the analysts – which, At the same conditions, it favors German titles and disadvantages Italian ones”.
WHY THE MARKETS LIKE THE DRAGON MOVE
If the structure of the Qe package divides the opinions of experts and analysts in half, for now the market has rewarded Draghi's move. Yesterday the Milan Stock Exchange closed on a 2,44% rally, in good company: Madrid + 1,7, Paris + 1,52% Frankfurt +1,32% and London +1,02%. The yield of the BTP fell during the day to a minimum of 1,57% with the spread reaching an intraday low of 101 (it then closed at 117 points) and the spread between the Spanish Bonos and the German 100-year dropped below 93(XNUMX). The euro it dropped below 1,14 against the dollar.
“Today's decision represents a milestone on the road to rebuilding the ECB's credibility,” says Luca Noto, bond manager of Soul Sgr. “Furthermore, the central bank affirms its willingness to maintain very accommodative financial conditions in the euro area, laying the foundations for a compression of spreads and stable or decreasing rates, a stable or weaker currency, with decreasing volatility and uncertainty. The measure of the effectiveness of the intervention will be visible on two elements: inflation expectations and the euro/dollar exchange rate”.
INVESTING WITH QUANTITATIVE EASING
At an operational level, i.e. of investment scenarios, UBS experts underlined that government bonds still have little room for upside from current levels. “Government bonds have triggered the rally, especially the peripheral ones – the experts of the Swiss bank led by Reinhard Cluse point out in a report – But from here we see little room for a further fall in spreads and yields. Instead, we expect yields to rise once the buying starts, or even sooner. No explicit news on a QE related to corporate bonds is a positive factor because it means that there will be "juice" still in the market for corporate spreads". For Ubs the beneficiaries will be high-beta and corporate high-yield stocks. There will continue to be demand for corporate peripherals, i low grades of investment grade a double B ratings they will remain in the positive phase and the Cocos will keep their ratings.
For Emmanuel Kragen, Global Strategist at Exane Derivatives, the positive short-term effects should continue in terms of: depreciation of the euro against the dollar, the Australian and New Zealand dollars and some emerging currencies “with an attractive risk/reward pair”; rise in the Eurozone stock market which should initially be supported by a "confidence effect" and subsequently by a rise in EPS corporate (earnings per share) following exchange rate depreciation; decline in global bond yields; effects positives on global high yields. In the long term, however, experts warn, these trends will depend on macroeconomic variables.
Exane the most visible impacts will be the psychological one and that deriving from the fall in the exchange rate, while the rise in the stock markets will have a limited impact given the low share of shares held by households as well as the drop in long-term rates which are already low.
WHAT IMPACTS ON MAIN STREET
And it is precisely on the effects of Qe on the real economy that fears are greatest. “On the markets – commented Gabriele Roghi di Invest Bank – a due reaction occurred, the Qe is a great help to the financial markets, the hope that it will transfer from here to the real economy is very low and hypothetical. We also see what is happening in Japan or the USA where there is never talk of the 93 million unemployed who are not in the unemployment statistics because they have been looking for work for more than two years or the boost to GDP given by Obamacare”.
After an initial first push, the markets will then start to focus on success or failure in terms of real growth. “There are legitimate reasons to be skeptical about the effectiveness of QE in a financial system dominated by banks like that of the Eurozone – says Darren Williams, Chief Economist of global management house AB – It is however important to note that there is already a good stimulus that is materializing in the form of lower crude oil prices and a weaker euro (together with an improved credit condition in the peripherals and a more growth-friendly fiscal approach). All of which suggests that Eurozone growth will accelerate this year even without help from QE".
